Refinancing debt can be a powerful financial move. The investment of time is relatively minimal and the process can save hundreds of dollars a month, and many thousands of dollars in interest over the life of the loan. For this reason, many people choose to refinance their mortgage and their student loans.
Unfortunately, refinancing mortgages and student loans at the same time is typically a mistake. Lenders are very conservative with their refinancing decisions and rely heavily on credit reports. Refinancing causes new lenders to show up on credit reports as well as multiple hard credit inquiries. This can make lenders nervous. Normally, multiple inquiries are not an issue to credit scores because they are treated as a borrower shopping around. However, when applications go in for different types of credit, such as a mortgage and student loans, it does count as multiple credit pulls.
For this reason, consumers are normally advised to apply to refinance one type of debt, wait 6 months to a year, and then apply to refinance the next one. This problem presents an important question to consider… which comes first: refinancing student loans or refinancing a house?
The answer to this question will depend upon a number of different factors. Some people will be better off targeting student loans first, while others will be better off addressing their mortgage.
One of the biggest considerations should be the size of the balance. For many people, a house is the largest purchase they will ever make and costs far more than their student loans. With a house costing much more, the opportunity to lower interest rates on the home is more important. If the mortgage will be for $300,000 and the total student loan debt is $20,000, the house usually should be the bigger priority.
However, some borrowers have large student loan debts that approach the size of a mortgage. If you have a $200,000 mortgage and $150,000 in student loan debt, the answer isn’t nearly as clear. When that happens, it is time to consider additional factors.
Existing Interest Rates
There is a wide range of student loan interest rates. Some borrowers have excellent rates in the 3 to 5% range, while other pay interest rates on their student loans that are well over 10%.
Borrowers with obscenely high interest rates may end up receiving a bigger savings by refinancing their student loans than they would their mortgage… even if the mortgage has a larger balance.
Market Interest Rates
The interest rates on the market should also be an important factor to consider. Mortgage rates tend to change on a daily basis while student loan interest rate offerings usually are adjusted once a month or even once a quarter.
All borrowers weighing the mortgage or student loan first decision should look up current mortgage rates as well as the student loan refinance rates. Comparing existing rates to the current rates on the market should shed some light on potential savings.
Loan Refinance Goals
A borrower’s individual goals for the refinance process should also be an important consideration. Chasing the lowest possible rate will often mean shorter repayment lengths. As an example, a homeowner may refinance their 30-year mortgage into a 15-year mortgage so that they can get lower interest rates. Similarly, a student loan borrower may opt for a 5-year repayment length instead of 10, 15, 0r 20 years. The advantage is lower interest rates, but the downside is that payments may be higher each month.
When refinancing into a repayment plan that will have higher monthly payments, it is important to consider how that will impact your other refinancing goals. The 15-year mortgage might have a great rate, but the higher minimum monthly payments will negatively impact your debt-to-income ratio and could make later refinancing of student loans more difficult.
As a result, it might be best to consider how refinancing will alter monthly payments. If the refinance will lower your monthly payments, it is a good idea to do that refinance first. If the refinance will raise monthly payments, it might be best to save that one for last.
One factor that goes beyond the math is personal priorities. If part of the appeal of refinancing student loan is the consolidation of many lenders into one, it should be given some consideration. Similarly, if you hate your current mortgage company and can’t wait to be working with a new lender, that factor should be considered as well.
Refinancing of student loans and mortgages can save a ton of money. Unfortunately, doing two at once isn’t usually the best idea.
The reality of the situation is that there are a number of factors to consider when deciding which one comes first.
Regardless of the debt you choose to refinance first, be sure to shop around to find the lowest possible interest rates. All mortgage lenders do not offer the same rates and terms, and there are at least 18 different student loan refinance companies who all have different approval processes. Refinancing can save money, but research before refinancing can save even more.